Photo credit: Yahoo News Canada
We normally have a coffee hour in church after Sunday service. Last Sunday, about four of us were discussing the Canada-US trade war. One man said Canada didn’t need to do anything as long as the situation didn’t degenerate into “fisticuffs”.
I wasn’t surprised, then, when I read that a free-market think tank has called on Canadian policymakers to turn the other cheek as the United States ramps up its cross-border tariffs.
National Post reports that Vincent Geloso, a senior economist at the Montreal Economic Institute and the author of a new research note on the ineffectiveness of counter-tariffs, said: “When you’re in a trade impasse like the one we’re in with the US, what works is being able to outlast the other guy.”
“Eventually, there’ll be an opportunity to act at the right time in the right way,” he said.
The Carney government has been scrambling to respond to US President Donald Trump’s use of Section 338 of the Tariff Act of 1930 to put 50 per cent tariffs on a host of Canadian goods. The tariffs took effect on Aug. 22, after last-minute trade talks collapsed.
Last week, Prime Minister Mark Carney announced counter-tariffs on $27.6 billion in imports from the US, set to take effect on Sept. 8.
But Geloso says that Carney would be smart to learn from Canada’s response to the US’s first use of the Tariff Act during the Great Depression.
“In the ’30s we did counter-tariffs. We actually did two rounds of retaliation, (both) of which did absolutely nothing,” said Geoso.
Geloso says that these measures had no perceptible effect on the American economy or the direction of US trade policy. However, they did substantial harm to Canada’s economy.
He estimates that falling prices for goods Canada sold to other countries caused about half of Canada’s losses during the Great Depression, with counter-tariffs being a key driver of this effect.
Geloso said that what ultimately resolved the impasse was a change in government in the US, with Demcrat Franclin Delano-Roosevelt winning a massive mandate in the 1932 presidential election. He added that Roosevelt demonstrated his commitment to open markets by naming free-trade evangelist Cordell Hull his first secretary of state.
The Roosevelt government quickly resolved cross-border trade relations, signing a reciprocal trade agreement with Canada in 1935.
Geloso admits that the situation is somewhat different this time around, with Canada facing punitive, targeted cross-border tariffs, rather than ones the US has broadly applied to all its trade partners. Section 338 has never before been invoked in the Tariff Act’s 96-year history.
However, he says this doesn’t change the fundamental dynamics of the Canada-US relationship.
“What worked then is what will work now, and that’s being patient,” said Geloso.
Geloso said he supported Carney’s decision to walk away from negotiations but said the prime minister needs to avoid being goaded into a tit-for-tat tariff war that Canada cannot win.
“(Carney) can either play the jingoist card or the adult card,” said Geloso. “And the adult card would be to exercise patience and wait for the other gy to tire himself out of the shenanigans he’s doing.”
He noted that Trump’s job approval rating is at a historic low and said he expected Trump to be a “lame duck” after November’s midterm elections.
Geloso said that, for now, Carney should focus on implementing measures that mitigate the immediate damage of the tariffs and make Canada’s economy more resilient, such as reducing red tape for businesses.
He added that Carney is in a good position to dig in for extended trade interruption, with a majority government and the strong backing of Canadians on the Canada-US relations file.
